What the digital generation wants from Chinese real estate

Asia’s climbing urbanisation rates are contributing to an expanding middle class and rising income levels. The ripple effect? An ongoing boost to the region’s already burgeoning real estate market

Building the real estate of the future
Artist’s impression of Funan by CapitaLand. Scheduled to open in 2019, the complex will feature coworking spaces for a mobile workforce and coliving apartments for young professionals 

Urbanisation remains a key driver for the retail market in China. Around 56 percent of the country’s population lives in cities, a figure that is projected to reach 60 percent by 2020. As such, there could be as many as 20 million people joining the urban population each and every year.

Likewise, Chinese consumption is projected to continue on an upward trajectory to reach an estimated $2.3trn by 2020, even if GDP growth were to slow to six or 6.5 percent (a figure that nonetheless far exceeds the estimated growth of other developed markets). These factors, together with an expanding middle class and growing income levels, are therefore expected to continue fuelling retail growth in China in the years to come.

Interestingly, other countries in Asia are also experiencing similar urbanisation as a result of improving demographic trends. With an annual GDP growth rate averaging six percent over the last three years, Vietnam is one of the fastest growing economies in Asia. Its economy is underpinned by sound fundamentals, such as a young, educated population, a growing middle class and rapid urbanisation. Such demographic advantages, coupled with consistently high FDI inflows, have boosted residential and office demand – especially in Ho Chi Minh City, an economic hub in its own right.

In light of these mounting prospects, World Finance spoke with Lim Ming Yan, President and Group CEO of CapitaLand – a global property developer, owner, operator and manager of diversified asset classes – about the past, present and future of the Asian real estate market.

How has the real estate market in Asia changed in recent years?
In the past, the real estate market in Asia was cyclical. However, after the global financial crisis in 2008, there was a sharp recovery in many markets and a run up in real estate prices. Many Asian governments, including those in China and Singapore, implemented cooling measures to engineer demand-supply conditions and prevent the markets from becoming overheated.

More recent examples in China include the housing purchase restrictions (HPRs) in Shanghai and Shenzhen in March 2016, which have successfully slowed monthly price increases. These were followed by the tightening of existing HPRs and the reintroduction of HPRs in 21 Tier 1 to Tier 3 cities during the ‘Golden Week’ China National Day period in October 2016. These policies were implemented to reduce the risk of a hard landing in the property sector by restraining the aggressive increase of leverage by developers and households.

There could be as many as 20 million people joining the urban population each year

Despite the impact of cooling measures, CapitaLand achieved our second consecutive year of record residential sales in China in 2016, moving 10,738 units, with a sales value of RMB 18.1bn ($2.62bn).

We remain confident in the long-term growth prospects of China and will continue to look for suitable opportunities to expand our land bank, concentrating on the Tier 1 and upper Tier 2 cities to supplement our existing pipeline of around 40,000 residential units.

The cooling measures introduced in Singapore since 2009 include the qualifying certificate and Additional Buyer’s Stamp Duty. Consequently, Singapore residential prices have declined by 11.2 percent since 2013.

CapitaLand’s exposure to Singapore’s residential market now forms around four percent of our total assets. Despite the challenging market, we sold 571 residential units in 2016, representing a total sales value of SGD 1.4bn ($990m), which was more than double that of the previous year.

We also took proactive steps to market our three newly launched projects: Cairnhill Nine, which was the best selling Singapore private residential development in March 2016, and The Nassim and Victoria Park Villas. We also introduced the Stay-Then-Pay programme for completed projects in order to assist prospective buyers of our d’Leedon and The Interlace projects, which has been very well received.

For the office segment, there is a significant supply coming in 2017. Our office properties continue to do well, with about 97 percent occupancy – well above the Central Business District average occupancy rate. Our shopping malls in Singapore also continue to be resilient, as they are well located above transportation nodes and catchment areas. Despite a muted outlook for Singapore retail, we remain confident with proactive tenant management and asset-enhancement initiatives.

What is the appeal for those wishing to invest in real estate in Asia?
Asian countries continued to enjoy stable growth in the past year. Real GDP growth in the 10 ASEAN member countries, plus China and India, is expected to be an average of 6.2 percent over the next five years. Private consumption should continue to make a large contribution to this growth. Most importantly, the region is supported by attractive fundamentals, such as urbanisation, young populations and a rising middle class driving domestic demand, as well as growing export figures and economic policies that attract foreign capital.

SGD 78bn

CapitaLand’s managed real estate assets


The number of cities in which CapitaLand operates


classes of asset

China, which is one of our core markets, grew by around 6.7 percent in GDP in 2016, and is projected to continue growing at a similar pace in the medium term due to the government’s continued efforts to boost consumption. Consumption, services and higher value added activities will be the main contributors to China’s resilient growth this year. Tighter labour markets will also support continued growth in incomes and private consumption.

Vietnam will be another top performer, with a projected annual expansion of 6.2 percent between 2017 and 2021. Its high growth rate will translate to higher household income, which will underpin private consumption. Rising affluence in Vietnam, an expanding middle class and a stable government are very positive factors for increasing FDI. Such factors bode very well for investments in shopping malls and hospitality, such as serviced residences, throughout Asia.

What value is there to working with someone like CapitaLand when taking this step?
CapitaLand manages real estate assets worth more than SGD 78bn ($55bn), which is one of the largest portfolios in Asia. The group’s investment management business comprises numerous private equity funds, as well as a collection of five real estate investment trusts (REITs) listed in Singapore and Malaysia: CapitaLand Mall Trust, CapitaLand Commercial Trust, Ascott Residence Trust, CapitaLand Retail China Trust and CapitaLand Malaysia Mall Trust.

Our competitive advantage is our extensive market network, as well as extensive design, development and operational capabilities. This network is reflected in our position as the largest shopping mall developer, owner and manager in the region, with 104 shopping malls across five Asian countries: Singapore, China, Japan, Malaysia and India. We are also one of the world’s leading international serviced residence owner-operators, with more than 50,000 units worldwide in locations ranging from Asia and Europe to the US.

How has your business model evolved since starting out?
Our business has evolved significantly since 2013. First, we simplified the organisation structure from three tiers of listed companies to two tiers, comprising CapitaLand and our five listed REITs. Our current business structure makes it easier for investors to make informed decisions, as well as for our business operations to leverage scalability.

Second, we have changed the mix of trading properties versus investment properties to ensure strong recurring income. At any point in time, we aim to maintain a balanced portfolio of trading, investment and fee-based business. As of 31 December 2016, investment properties made up about 76 percent of the group’s assets, while the remaining 24 percent comprised trading properties. This optimal asset mix enabled us to deliver a steady stream of recurring income from our investment properties, while we continued to realise gains from our trading properties. Furthermore, we will continue to recycle capital through our REITs and private equity vehicles.

Technology will drive the real estate of the future, providing innovative solutions in a number of key sectors

In recent years, we have focused more on our asset-light strategy to generate recurring income through management services. For serviced residences, we have grown Ascott’s business significantly through management contracts and have entered several new markets, such as the US, Saudi Arabia, Turkey, Myanmar, Cambodia and Laos. We have also signed two management contracts to manage shopping malls in Changsha and Xi’an, China. This asset-light strategy enables us to gradually scale up our existing shopping malls network.

How do you see the market changing in the coming years?
Technology, coupled with the Millennial generation that grew up in the digital world, will redefine how we live, work and play. To stay relevant, we are planning for the future and seeking evolution in our businesses and properties.

CapitaLand touches the lives of millions of people throughout our network of over 500 properties across more than 130 cities in over 20 countries. In 2016, we took important steps towards making real our vision to create the real estate of the future, where customers can have convenience, value and a seamless experience between online and offline. We launched our venture arm, C31 Ventures, to invest in new economy start-ups that are relevant to our businesses; we created a new serviced residence brand, lyf, to tap into the Millennial market; and we started the redevelopment of two key projects in Singapore (Funan and Golden Shoe Car Park).

Instead of perceiving digital disrupters as threats, we leverage on them. Technology will drive the real estate of the future, providing innovative solutions in the areas of energy, operations and maintenance, building and construction, design and building materials, real estate funding, as well as customer engagement.